True to their word, the new Chinese government headed by Premier Li Keqiang and General Secretaryt Xi Jinping, is moving quickly to install important economic reforms seen as vital for ensuring strong future growth and economic stability. With traditional Western export markets stagnating and faced with rising labor costs, the Chinese government is trying to spur the growth of a strong domestic-demand driven consumption market.
After many failures of the last stimulus plan during the Great Recession, the Chinese government has been hesitant to launch a similar plan in the face of the slowing global economy. Instead, the government is hoping that key economic reforms will spur strong market driven growth. These key economic reforms focus on turning the economy inwards and relying less on exports. Among the key principles being considered is lifting the one billion dollar FDI ceiling for sovereign wealth funds and similar financial entities. This is especially important given that FDI levels have dropped for the last six months.
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The European Union has dried up as a source of exports, and while many analysts are now hoping that the worst is over in the old continent, chances are that it will take years for the struggling economies of Western Europe to fully recover. A similar situation is occurring in the United States with consumer consumption stalling and hyper competitive markets squeezing out profit margins. Understandably many Asian economies, including China, now wish to reduce their dependency on exports to Western markets.
The drive to strengthen the domestic consumption market is part of a larger drive to reform the Chinese economy. The potential reforms could be sweeping in future years. Already the government is considering sweeping land reform in rural areas, including increasing payments to farmers whose land is being seized for development and government projects. The Chinese government is hoping that this will spur migration to urban areas which are currently facing labor shortages, especially for unskilled labor.
The government is also considering dropping Value Added Taxes (VAT) and replacing them with different taxes. The Chinese government is also considering lowering interest rates, which it hasn’t done since July and spurring private sector led growth. These steps go hand-in-hand with increasing expenditures on education and R&D in China’s universities, which should help create a more vibrant and competitive university system. China is also ramping up spending on its military, especially in high-technology fields, which could lead to breakthroughs applicable to the private sector.
The political ramification of a strong domestic market could be huge. While the United States may be most well-known for its massive global military, its domestic markets have also played a huge role in the global geopolitical landscape. Access to American markets has been vital for numerous countries. The high levels of discretionary income have fueled economic development in countries across the world, it allowed many countries to lift themselves up the “ladder.” Yet, consumer consumption is slowing in the US and household debt levels have reached an all-time high, resulting in a saturated market.
If China succeeds in creating a strong consumer market it may be able to use access to this market as an important political tool in International Affairs, similar to U.S. efforts throughout the Cold War. This could help shift power to China at a rate more quickly than currently estimated. While China’s military still lags behind the U.S. by decades, a strong domestic market could help China counter the U.S. throughout its region and across the world.